Greece intends to present a fresh austerity plan Friday and expects its next aid tranche to flow, a government official said, after Moody's cut the country's credit rating deep into junk territory.
The budget plan will include a faster pace of privatization and 6.4 billion euros ($9.2 billion) of new savings including some tax rises, to eat into Greece's debt mountain, the senior official told Reuters Thursday.
Prime Minister George Papandreou will present the details to Luxembourg's Jean-Claude Juncker, who chairs the group of euro zone finance ministers, Friday after talks between Athens and inspectors from the European Commission, European Central Bank and International Monetary Fund wind up.
The euro rose in response to the Reuters report.
Greece signed up to a 110 billion euro bailout in May last year and, as well as working to secure the latest portion of that, is discussing a second rescue deal that could total some 65 billion euros to tide it over through 2013.
Officials are hopeful the troika of institutions will now release a 12 billion euro loan tranche Athens needs to cover its immediate funding needs despite criticism that it has failed to meet debt-cutting targets.
Juncker held out hope of a comprehensive deal before June is out.
My personal feeling is Greece will have a new program submitted under strong conditionality. I will have a meeting in Luxembourg tomorrow with the Greek prime minister, he told reporters. I would like us to come to a final conclusion as far as Greece is concerned before the end of this month.
Minds will be concentrated after ratings agency Moody's downgraded Greece by three notches deep into junk territory, citing a 50/50 risk that Athens would have to restructure its debt and impose losses on private investors.
Short-dated Greek bond yields were up to 40 basis points higher and the cost of insuring against default rose.
It looks increasingly likely some sort of package will be cobbled together, said Nick Stamenkovic, rate strategist at RIA Capital Markets. But until then investors are wary and there's a huge amount of uncertainty given the political problems.
EU and ECB policymakers have differed over the shape of a second rescue, with the latter arguing firmly against any form of debt restructuring. However, two European central bankers have now signaled a willingness to compromise.
ECB hawk Juergen Stark said Wednesday a voluntary deal for investors to keep renewing Greek debt holdings might be acceptable as part of a broader package, while Vitor Constancio said Thursday that although the bank rejected outright debt restructuring, it did not oppose all private sector involvement in a new deal to aid Greece.
That may help ease the way to a further bailout but there is still no sign of consensus between Greek political parties, demanded by the EU as a condition for further help.
There is even unrest within Papandreou's ruling party.
A group of Socialist party MPs demanded Thursday a full debate of further austerity measures and privatizations, in a move that could complicate negotiations further.
IMF officials had warned over the past week that the global lender would not pay up its part of the latest aid tranche this month unless Greece's 2012 funding gap was addressed, forcing euro zone governments to come up with a broader financing plan.
A harsh restructuring that would force losses on private creditors has been ruled out for now, but Germany and allies such as Finland and the Netherlands want some sort of symbolic participation by the private sector in a second rescue.
EU finance ministry officials met in Vienna Wednesday to come up with a range of options for their bosses to consider.
While the latest aid tranche could be released soon, haggling over the shape of a second bailout package is expected to continue up to a summit of EU leaders in Brussels on June 24.
As Moody's underlined, even a second rescue would be unlikely to assuage concerns that Athens will eventually be forced into a coercive restructuring of its debt, which stood at nearly 330 billion euros -- or close to 150 percent of gross domestic product -- at the end of last year.
SOLID SPANISH AUCTION
A key fear for investors is that a Greek restructuring would spill over to other high debtors in the euro zone with Spain's much larger economy the potential tipping point for the bloc.
Spain saw strong demand at an auction of 3.95 billion euros ($5.7 billion) of medium-term bonds Thursday, suggesting investors view it as a different proposition to its debt-laden peers though uncertainty over how the Greek aid talks will pan out kept yields elevated.
Greek newspapers reported that Athens had agreed to sell a 10 percent stake in OTE Telecom to Deutsche Telekom and has begun talks on selling a further 6 percent to the German firm.
The sale will fetch 410.7 million euros to help pay down debt, the first baby step toward a 50 billion euros target for privatization proceeds, which the EU is demanding be stepped up.
The EU may pressure Athens into accepting unprecedented intrusive external supervision to ensure progress.
Greece will have to implement a very ambitious privatization program, it has to implement it, not only announce it, the EU's Juncker said.
(Additional reporting by Ingrid Melander and George Georgiopoulos in Athens, Paul Day in Madrid, writing by Mike Peacock; Editing by Ruth Pitchford, John Stonestreet)